Options Update: Are Fifth Third Bancorp Traders Calling for a Bottom?
Shares of Fifth Third Bancorp
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FITB |
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PowerRating) plunged more than 34% last week, with the decline accelerating after the company missed Wall Street’s expectations for a third-quarter profit of 21 cents per share on October 21. However, it seems that many options speculators are betting that the worst has passed for FITB, as the stock has seen what appears to be put buying this afternoon. The likely driver for this positioning is the company’s application for $3.4 billion from the U.S. Treasury Department – part of the $700 billion financial rescue plan.
Diving into today’s option volume, more than 34,000 puts have traded on FITB so far, outpacing the stock’s daily put volume by a ratio of nearly 8-to-1 and placing the shares on our Intraday Volume Explosion List. The vast majority of this volume has changed hands at FITB’s December 5 put, but it was the wealth of bid activity that caught my eye today.
Anatomy of a Fifth Third Bancorp Put Position
Looking at the chart above, you can see that most of today’s December 5 put activity on FITB has traded at the bid price. This preference for trading options at the bid price could indicate that we are seeing sell-to-open put volume on the shares, an assumption that is supported by the fact that today’s volume at the December 5 put has outstripped open interest at this option. Running with the put-sell theme, let’s take a closer look at the 8,000 contracts that traded at 11:21 a.m. Eastern time.
The position breaks down as follows: The trader sold 8,000 FITB December 5 puts for $0.80, or a total credit of $640,000 — ($0.80 * 100)*8,000 = $640,000. Remember, in a put sell position, all a trader needs is for the underlying stock to remain above the sold strike through expiration. So, as long as FITB stays above 5 through December 19, the trader keeps the premium received. That said, let’s see if the stock’s technical picture or sentiment backdrop provide any clues on the potential for FITB to hold its ground during the next several weeks.
Getting Technical
Like most of the U.S. banking sector, FITB has been bludgeoned severely in 2008, dropping more than 67% since January. The shares have accelerated to the downside during the past month, falling 51% from their September 19 close at $18.88 per share. However, the stock has shown resiliency at the 8 and 9 levels. Specifically, the 9 level has contained all but 2 pullbacks in the shares since mid-June, while the 8 level halted plunges on September 29 and October 24. Given this technical backdrop, a bullish position on the shares looks less than appealing, but a put-sell position at a deep out-of-the-money strike holds considerable promise.
The Sentiment Drivers
Sentiment for FITB has little contrarian value at the moment, with the wealth of pessimism levied against the shares mirroring the equity’s poor technical performance. Options traders have pushed the stock’s Schaeffer’s put/call open interest ratio (SOIR) to within 9 percentage points of an annual peak, while 12 of the 14 analysts following the shares rate them a “hold” or worse. Even short sellers have placed heavy bets against FITB, with more than 9.4% of the stock’s total float sold short.
The Verdict?
,p>The takeaway from the stock’s sentiment and technical backdrops for a put-sell trader is that negativity is already near extreme levels, while FITB has held at key long-term support levels. As such, we would need another severe lashing from investors and analysts to push these readings any deeper into bearish territory – an unlikely event if FITB secures its $3.4 billion in Treasury funding. Meanwhile, any unwinding of investor negativity could provide additional support for the equity. In the end, this configuration could confound bullish investors looking for a sharp rally from the shares, but should benefit put sellers looking for a stagnate performance from FITB.
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Copyright Schaeffer’s Investment Research. www.schaeffersresearch.com.